NY Times, September 18, 2008
Dow Closes Down Nearly 450 Points
By MICHAEL M. GRYNBAUM
One of the most stunning government bailouts in American history failed
on Wednesday to stem the runaway fears engulfing the global financial
system.
Investors embarked on a frenzied flight to safety on Wednesday, just
hours after the Federal Reserve and the Treasury Department propped up
American International Group, the ailing insurance giant, with an $85
billion loan. And many wondered which once-proud institution would be
the next to fail.
“There’s a growing sense that there’s no end to this in sight,” Edward
Yardeni, the investment strategist, said.
Investors, seeking security in a market that has so far refused to
stabilize, poured money on Wednesday into ultra-safe government notes,
driving the yield on short-term Treasury bills to the lowest levels in
50 years.
Stocks around the world plummeted. The Dow Jones industrial average lost
more than 200 points, despite the federal government’s efforts to prop
up A.I.G. The move avoided a potentially devastating collapse of the
company, but investors appeared already to have shifted their attention
elsewhere.
“The positive impact of these government fixes, rescues and bailouts
clearly are wearing off,” Mr. Yardeni said. “There’s no novelty in it
any more.”
The broad Standard & Poor’s 500-stock index traded down about 2.8
percent. In London, the benchmark FTSE 100 index closed down 2.26
percent, and indexes in Paris and Frankfurt fell more than 2 percent.
With the Fed now saddled with billions of dollars in loans and
collateral from troubled financial institutions, the Treasury said it
would issue $40 billion in new government bonds to help the central
bank. The price of gold, a traditional safety spot in turbulent times,
rose $70 an ounce, the biggest one-day rise in nine years. In Asia,
investors were starting to show hesitation even before the financial
earthquake of the last week. Now — from central banks to industrial
corporations, from hedge funds to the individuals who lined up here to
withdraw money from A.I.G. on Wednesday — a wariness toward the United
States is setting in that is unprecedented in recent memory.
“It doesn’t take much for the man on the street to become very, very
concerned,” Dan Parr, the head of Asia-Pacific for brandRapport, a
marketing consulting agency with an office in Hong Kong.
And the concern was clear among customers.
“I chose A.I.A. for better service and reliability, as an American
brand,” said Jin Ling, 34, a customer in Beijing, referring to an A.I.G.
subsidiary. “Who would expect it to suddenly go bankrupt?”
In Washington, President Bush for months had asserted that “the
fundamentals of the economy are strong.” On Wednesday, in a subtle but
significant shift of language, the White House served up a new
formulation: “The economy has the strength to be able to deal with the
shocks.”
A Bush spokeswoman, Dana Perino, suggested that the new language
reflected not only the administration’s sensitivity to the fall campaign
but also a new reality on Wall Street.
“I think it reflects a realization that we have today, the market
dealing with a lot of information that’s coming its way,” Ms. Perino
said. “We believe in the strength of our — and the resiliency of our
system to be able to be flexible, to be able to handle that information,
but it’s just going to take us a few days, maybe longer, to see how that
shakes out.”
Stress showed in all sectors of the global financial system. The cost of
insuring corporate bonds spiraled higher, particularly for Morgan
Stanley and Goldman Sachs, venerable investment banks that are commonly
considered among Wall Street’s strongest brands.
“These are levels we haven’t seen before for these names,” Dave Klein, a
manager at Credit Derivatives Research, said.
Shares of those companies also traded sharply lower, with Morgan Stanley
slipping 30 percent and Goldman down 18 percent. Shares of Wachovia and
UBS also showed double-digit percentage point declines.
The last two weeks has seen some of the biggest names in finance brought
to their knees. The bailout of A.I.G. followed bankruptcy at Lehman
Brothers, the sale of the brokerage house Merrill Lynch and the
nationalization of Fannie Mae and Freddie Mac, the quasi-public mortgage
buyers.
“These financial institutions are huge — no one would ever have imagined
that you’d have so many imploding at the same time,” Mr. Yardeni said.
Investors, he said, believe “there’s no game plan.”
Shares of A.I.G. shed another 40 percent as shareholders worried that
their holdings would be wiped out by the government deal.
Some stock analysts said that the volatility in the market — and the
sheer unpredictability of the last week’s events — had left investors
scared.
“I think every day is sui generis now,” Douglas M. Peta, market
strategist at the brokerage firm J. & W. Seligman & Company, said.
“Every 30-minute segment might be.”
Mutual fund investors have been pulling money out of American and global
equity funds throughout the year, but the pace has quickened sharply.
Customers pulled almost $11 billion out of all equity funds on Monday,
about $7 billion from United States funds and $4 billion from global
funds, according to Charles Biderman of TrimTabs, a research firm that
tracks the funds.
TrimTabs estimates that, in the first 10 business days of this month,
American funds have been hit with redemption demands totaling $13
billion, while global funds have handed back $12.6 billion, eclipsing a
record set in January and reflecting the dismal performance of global
funds in the last six weeks.
Still, these withdrawals represent tiny fractions of the overall assets
in such funds, and are well below the monthly records set in July 2002.
And Mr. Biderman says he believes a wave of panicky selling “is
symptomatic of what occurs at market bottoms.”
Some market analysts are worried that investors will bolt from money
market funds — low-yield investments that are considered relatively safe
— on the heels of Tuesday’s announcement that the per-share value of a
very large money fund, the Reserve Fund’s Primary Fund, fell below a
dollar — only the second time in history that one of these popular funds
had “broken the buck.”
Alex Roever, an analyst who monitors short-term credit markets for
JPMorgan Securities, noted that large money fund managers were
“proactively communicating to shareholders” about their funds’ holdings.
“We do not expect a massive wave of money fund redemptions,” he said in
a Wednesday morning research report, but he cautioned that money fund
managers would probably shift toward more liquid investments. Also, he
noted, smaller fund managers might lose customers to stronger fund
companies with deeper pockets.
In Europe, A.I.G.’s unit says that it provides insurance to more than 85
percent of the European companies on the European FT 500, a broad index
of large companies, and many other small and medium-size businesses.
Some banks may ultimately be forced to write-down the value of the
contracts or buy new protection more expensively, analysts said.
Hank Calenti, a credit analyst at RBC Capital Markets in London, said
much of the credit protection purchased could be replaced, though
probably at a higher cost.
In Asia, stock indexes ended mixed. The Nikkei in Tokyo closed up 1.2
percent, and the Hang Seng index in Hong Kong closed down 3.6 percent
after jumping 1.7 percent at the open.
Financial shares led the declines, with Hong Kong-listed shares of
Industrial and Commercial Bank of China, the top mainland Chinese bank,
falling nearly 10 percent and the market heavyweight, HSBC, dropping 2.7
percent.
The Chinese Enterprises index of mainland Chinese companies listed in
Hong Kong was down 4.2 percent, tracking losses on the mainland, where
the Shanghai composite index dropped 2.9 percent to a new 22-month
closing low, led by bank shares. Mainland-listed shares of four banks,
including Industrial and Commercial Bank of China, plunged to the 10
percent daily limits. On Tuesday, eight such shares dropped by the
maximum amount.
On Monday, the American stock market suffered its worst single session
since the days after the 9/11 terrorist attacks.
“I don’t know what can come out right now to restore confidence at this
point,” Ryan Larson, a trader at Voyageur Asset Management in Chicago,
said. “We’ve still got a lot more fear to go until a restoration of
confidence.
“I want to be a bull, but you’ve got to face the reality at some point.
This environment we’re in is historical on many levels.”
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